State sector still too large, says the World Bank

  • 2010-04-07
  • From wire reports

HALF WAY THERE: The World Bank has delivered its report to the Latvian government recommending that more cuts in spending are needed in order to achieve further budget deficit reductions. The moves would also bring the government sector into line with other Western European countries, as the current 14.2 percent of the working population that is on the government payroll is too high. Prime Minister Valdis Dombrovskis (New Era) says that an assessment needs to be done first, on how much can be cut for next year’s budget, before putting together a proposal on carrying out the changes. The government needs to bring down the 2011 budget deficit to not more than 6 percent of GDP; this year’s deficit is expected to be not more than 8.5 percent of GDP, reports news agency LETA.

RIGA - Despite drastic cuts in public sector salaries in Latvia brought about by the virtual bankruptcy of the country last year due to the economic crisis, World Bank experts still believe there is more to trim, reports news agency LETA. The World Bank points out that 22.8 percent of all state expenditures are paid out in wages for public sector employees. The bank did not include wages for doctors and nurses in their calculations.

The World Bank acknowledges though that a further lowering of wages in the public sector would be very risky in the current situation. The WB has also come to the conclusion that the number of persons employed in the public sector - 14.2 percent of economically-active residents, is too high a figure for Latvia. Doctors and nurses are not included in this calculation, either.

These are only several of the many WB conclusions and proposals, released on March 31, for the Latvian government, to consider in looking for ways to cut an additional 500 million lats (714.2 million euros) from the country’s budget deficit.
World Bank recommendations for the reduction of budget spending should be treated with some caution, said Prime Minister Valdis Dombrovskis (New Era) in  an interview on Latvian State Radio. “Of course, we cannot implement all of these recommendations,” he said, noting that the government must assess how much next year’s budget should be cut, and then put together proposals of how to carry this out.

According to Dombrovskis, the exact amount by which next year’s budget should be reduced will be seen when the Finance Ministry produces its macro-economic development scenario in May. The prime minister admitted that the majority of spending cuts in the next budget will have to be made from the master budget, and not through cuts in social spending. Additionally, the premier added that the World Bank’s suggestions are short-term solutions, while the government should think about medium-term action. So, for example, the Welfare Ministry is working on proposals to ensure the sustainability of the social budget.

The government’s aim is to ensure that the budget deficit next year does not exceed GDP by more than 6 percent. Latvia has to think for itself how to bring the deficit down from 8.5 percent of GDP this year, to 6 percent in April of next year. The World Bank has proposed that Latvia consider even tougher budget cutting measures, which would affect personal income even more, and would also lead to additional cuts for pensions and social benefits, as well as to the health care and education systems.

A bank delegation was in Riga from March 16 to March 26 to continue its review of Latvia’s finances.
The prepared document by the WB on possible budget cutting possibilities points out that Latvia can save approximately 10 million lats on implementing a new control mechanism for the unified salary system and the creation of new posts within the state administration. The WB recommends further staff reductions, particularly in agencies subordinated to ministries, state owned enterprises and local government bodies, which would save  an additional 10 - 20 million lats. Also recommended is the further elimination or consolidation of functions, especially those performed by some agencies and state owned enterprises, which could cut budget expenditures by a further 50 million lats.

Tightening public financial management controls would save an additional 10 to 30 million lats, and more careful control of the management of funds transferred to state-owned enterprises under the Education, Culture and Transport Ministries is needed.

Next up is the phasing out of direct subsidies to loss-making enterprises at both the central and municipal levels, which would save from 40 to 150 million lats at the central level, and 20 to 70 million lats at the local level. Also recommended is lowering the amount of pension income exempt from taxation, from 165 lats per month, to 80 lats per month, which could save an additional 85 million lats.

Further recommendations include the elimination of parental benefits, replaced with a flat childcare benefit of 100 lats paid from the State Budget. Such reform would save the budget an additional 65 million lats.
The WB proposes to reduce the number of budget-financed places by 50 percent in all higher education institutions or reduce the level of budget financing for each student by 50 percent, and make up the difference with 50 percent co-payments by students in budget-financed places, which would save 27.4 million lats. Savings of 6 to 20 million lats would be realized by suspending government subsidies on student loans.

The WB also recommends reducing hospital beds to 450 per 100,000 population in 2010 (with its impact on the 2011 budget), and 350 per 100,000 in 2011 (with its impact on the 2012 budget), which could save 10 million lats annually.
Latvia’s overall unemployment rate at the end of March came in at 17.3 percent, representing 194,260 jobseekers.